Rev. Rul. 74-252

Advice has been requested whether, under the circumstances described below, payments made by a company to a former employee upon the termination of their employment relationship are "wages" for purposes of the Federal Insurance Contributions Act, the Federal Unemployment Tax Act, and the Collection of Income Tax at Source on Wages (chapters 21, 23, and 24, respectively, subtitle C, Internal Revenue Code of 1954).

In the instant case the employee entered into an employment contract that stipulated that he would perform services for the company for a period of three years. Under the terms of the contract, the employer could terminate the relationship at any time provided the individual was paid an amount equal to an additional six months salary. The employer subsequently terminated the employment relationship and began paying the stipulated monthly amounts.

Sections 3121(a) and 3306(b) of the Federal Insurance Contributions Act and the Federal Unemployment Tax Act, respectively, define the term "wages," with certain exceptions not here material, as "all remuneration for employment." Section 3401(a) of the Code, relating to the withholding of income tax, contains a similar definition.

Sections 31.3121(a)-1(i), 31.3306(b)-1(i), and 31.3401(a)-1(a)(5) of the Employment Tax Regulations provide that remuneration for employment, unless specifically excepted, constitutes "wages" even though at the time paid the individual is no longer an employee.

Section 31.3401(a)-1(b)(4) of the regulations specifically provides, for purposes of income tax withholding, that all payments made by an employer to an employee on account of dismissal, that is, involuntary separation from the service of the employer, constitute "wages" regardless of whether the employer is legally bound by contract, statute, or otherwise to make the payments.

Although there is no similar provision in the regulations which applies for purposes of the Federal Insurance Contributions Act or the Federal Unemployment Tax Act, the law has been that they both apply to such payments since the Social Security Act Amendments of 1950, Pub. L. No. 734, 81st Cong., 2d Sess. (August 28, 1950), 1950-2 C.B. 217, eliminated the provision of prior law which had excluded dismissal payments from "wages" if the employer was not legally required to make them. See H.R. Rep. No. 1300, 81st Cong., 1st Sess. 124 (1949), 1950-2 C.B. 255, 277, 300.

Rev. Rul. 58-301, 1958-1 C.B. 23, holds that the consideration received by an employee for the cancellation of his employment contract is not "wages" for purposes of taxes imposed by the Federal Insurance Contributions Act and for purposes of Federal income tax withholding.

In this case the payments were made by the company to the employee upon his involuntary separation from the service of the company and were in the nature of dismissal payments. They were made pursuant to the provisions of the contract rather than as consideration for the relinquishment of interests the employee had in his employment contract in the nature of property.

Accordingly, it is held in the instant case that these payments are "wages" for purposes of the Federal Insurance Contributions Act, the Federal Unemployment Tax Act, and the Collection of Income Tax at Source on Wages.

Rev. Rul. 58-301 is hereby distinguished since the payments in this case were in the nature of dismissal payments and were not consideration for the cancellation of the employment contract of the individual as in that Revenue Ruling.